A Legal Guide to Understanding Cryptocurrency

Articles > Technology

A Legal Guide to Understanding Cryptocurrency

February 25, 2021         Daniel Katz

A fruitful development of the 21st century has been that of cryptocurrency. While this form of trading remains somewhat unclear, it is quickly becoming popular in Australia. In fact, the ATO estimates that there are between 500,000 to 1,000,000 cryptocurrency traders in Australia. With that being said, the government has begun regulating how cryptocurrency is bought, traded and taxed.

What is Cryptocurrency?

In simple terms, cryptocurrency is a form of currency which substitutes real money for digital files. These files are created by cryptography. Cryptography is an encryption technique used to secure networks. The distributed nature of the network means that cryptocurrency is incapable of being counterfeited or double-spent.

Cryptocurrency is built on blockchain technology. Blockchain is a form of record-keeping technology which chains information and transaction data chronologically in blocks. In Bitcoin’s case, they use blockchain in a decentralised way. This means that all user information is stored in different computer networks around the world. These networks are operated by different groups of individuals. This ensures that each bitcoin is not controlled by one entity. It also means that Bitcoin extends beyond the control of any government, bank or other central authority. This is because all transactions are transparent, and can be viewed using blockchain explorers. In essence, this means that one could track Bitcoin on its journey after it has been used.

How is Cryptocurrency Regulated in Australia ?

While Australia has been progressive in their stance on cryptocurrency, it has been subject to heavy regulation since 2017. In particular, AUSTRAC have implemented new laws pertaining to anti-money laundering and counter-terrorism financing (AML/CTF Act). This was implemented in order to regulate digital currency exchange (DCE) providers. Here is a breakdown of the regulations:

  • DCEs that operate their business in Australia must register with AUSTRAC.
  • DCEs must establish and maintain an AML/CTF program. This will assist in identifying and mitigating the chance of money laundering and terrorist financing risks. 
  • Customer identities must be identified and verified, and their transactions must be monitored.
  • Authorities must be notified of suspicious activities or matters, threshold transactions and instructions on international fund transfers.
  • DCEs must keep records of all of the above points.

Can Cryptocurrency be Taxed?

For individual investors, profits in Cryptocurrency are taxed as capital gains. For example, if you were to buy a bitcoin at $2000, and then later sell it for $15,000, you would be taxed on your $13,000 profit. If you made a loss, it would either be deducted from other profits, or may be carried over into subsequent years.  

For businesses who engage in crypto activities such as mining and stacking, regular income tax applies.

To Sum Up

Cryptocurrency, although complex, seems to be part of the future of online currency and transactions – or at least an ongoing financial asset for investment. If you would like to speak with a lawyer who understands crypto as well as you, then get in touch with us.

About Daniel Katz

Daniel is a legal intern at OpenLegal, placed in our legal content team. He is currently studying a Bachelor of Laws at the University of Technology Sydney. Daniel's interest lies in economics and media/startup law.